Expanded HRA Relief Proposed Under Income Tax Rules 2026
The proposed Income Tax Rules, 2026 bring relief for salaried taxpayers who follow the HRA exemption old tax regime. The draft rules suggest expanding the list of cities eligible for a higher 50% House Rent Allowance exemption.
At present, only residents of Mumbai, Delhi, Kolkata, and Chennai qualify for the 50% limit. All other cities receive a 40% cap.
Under the draft rules, Bengaluru, Hyderabad, Pune, and Ahmedabad are proposed additions to the higher exemption list.
Once approved, these changes will apply from April 1, 2026. As a result, salaried individuals living in rented homes in these cities may see meaningful tax savings.
How HRA Exemption Works in the Old Tax Regime
The HRA exemption old tax regime applies only to taxpayers who opt for the traditional structure. The new tax regime does not allow HRA benefits.
Under the draft rules, the exempt HRA amount is the lowest of three values. First is the actual HRA received. Second is the rent paid minus 10% of salary. Third is a fixed percentage of salary based on the city of residence.
For the listed metro and proposed cities, the third value equals 50% of salary. For all other locations, it remains capped at 40%. Therefore, the higher exemption applies only when it is the lowest among these values.
This structure ensures uniformity while linking tax relief to real housing costs. Moreover, it prevents excessive exemptions beyond actual rent payments.
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What the Proposed Change Means for Taxpayers
The expansion reflects rising housing costs in major economic hubs beyond the traditional metros. Cities like Bengaluru and Hyderabad have seen sharp rent growth due to job concentration and population inflow.
Under the proposal, a taxpayer earning ₹15 lakh annually in Bengaluru could reduce taxable income further. As a result, the total tax outgo may fall by nearly ₹19,000 each year, depending on rent paid.
However, this benefit applies only if the taxpayer continues under the old tax regime. Those who moved to the new regime must reassess their position.
Tax experts advise comparing total deductions against income. If deductions cross the break-even threshold, the old regime remains beneficial. Otherwise, the new regime may still offer simplicity and lower rates.
The proposal has also triggered debate online. Some taxpayers argue that nearby high-rent regions such as Gurugram and Noida deserve inclusion. For now, the draft rules restrict the list to four additional cities.
What Happens Next
The draft Income Tax Rules, 2026 are open for stakeholder feedback. After review, the government may finalize or revise the proposal before implementation.
If approved, the expanded HRA exemption old tax regime will help align tax benefits with modern urban realities. It may also influence taxpayer decisions ahead of the 2026 assessment year.